ServiceNow Q2 2026 Earnings: AI ACV Tops $1B as Growth and Margins Beat Guidance

ServiceNow delivered a stronger-than-guided second quarter, with subscription revenue, current remaining performance obligations and operating margin all exceeding the company’s outlook. The most important development was the continued commercial adoption of its AI portfolio: AI annual contract value exceeded $1 billion, while the number of customers with agentic AI in production rose ninefold over the past nine months.

The results reinforce ServiceNow’s position as a consolidating workflow platform for enterprises pursuing AI deployment, IT modernization and cybersecurity governance. However, the full-year subscription-revenue guidance increase was modest relative to the quarter’s outperformance, partly because some U.S. federal on-premise revenue shifted forward from the third quarter into the second.

As Reported on the Call

The Bigger Story

ServiceNow’s investment case is becoming increasingly tied to whether AI evolves from an add-on feature into a meaningful growth engine across its installed base. The company reported that AI ACV surpassed $1 billion in the quarter and said it remains on track to exceed its $1.5 billion AI ACV target by the end of 2026.

Management also said it is tracking ahead of its longer-term objective for AI to represent 30% of ACV by 2030. That remains a management target rather than a reported outcome, but the early signs are notable: net new AI ACV increased more than 40% sequentially, deals including five or more AI products rose 5.5x year over year, and million-dollar-plus AI deals tripled.

The central strategic argument is that enterprises need a platform to govern, connect and operationalize AI agents across fragmented systems. ServiceNow is positioning its AI Control Tower, configuration management database, workflow engine and recent cybersecurity acquisitions as a unified management layer for that activity.

That strategy could expand the company’s relevance beyond IT service management. But it also puts greater weight on execution in newer markets, particularly cybersecurity, customer relationship management and AI-native products where ServiceNow faces established competitors and must prove that adoption can translate into sustained revenue and margin expansion.

Revenue and Operating Performance

Second-quarter subscription revenue was $3.877B, up 23% year over year in constant currency and 150 basis points above the high end of management’s guidance. CRPO grew 21.5% in constant currency to $13.2B, exceeding guidance by more than 200 basis points.

The RPO balance reached approximately $29B, up 22% in constant currency. Management attributed part of that growth to longer average customer contract duration. Longer commitments can improve revenue visibility, although RPO is not current-period revenue and its conversion depends on the timing and terms of customer contracts.

Large-enterprise demand remained broad. ServiceNow closed 123 deals above $1M in net new ACV, up 40% year over year. The company said 18 of its top 20 deals included eight or more products, indicating that larger customers are expanding deployments across multiple workflows rather than buying isolated products.

Technology workflows produced 50 deals above $1M in net new ACV, including nine above $5M. ITSM appeared in 15 of the company’s top 20 deals, while IT operations management was included in 18. ServiceNow said demand for ITOM has benefited from increased customer focus on configuration management databases, which the company views as foundational for AI governance and infrastructure visibility.

Security and risk solutions appeared in 16 of the top 20 deals and generated 24 deals above $1M. Management said the acquisitions of Armis and Vesa are helping pull demand into its core platform, particularly around asset visibility, identity governance, vulnerability management and incident response.

CRM and industry workflows were included in 16 of the top 20 deals, with 15 deals above $1M. Management said CPQ, sales and order management were key contributors. It also cited an airline deployment of its voice AI CRM agents that is expected to handle 5 million annual customer-service calls in its first year, though no financial contribution from that customer was disclosed.

Employee Works, which combines ServiceNow workflows with Moveworks conversational AI, also gained traction. Management said deal volume grew more than 150% sequentially. This is an early indicator of cross-selling potential from the Moveworks acquisition, but the company did not quantify related revenue.

Profitability and Margins

ServiceNow reported a 29.5% non-GAAP operating margin, 300 basis points above its guidance. The outperformance reflected higher revenue and the timing of spending, primarily in marketing.

The company’s Q2 free-cash-flow margin was 16%. The profitability figures discussed here are non-GAAP.

For the full year, management expects a 31.5% non-GAAP operating margin and a 35% free-cash-flow margin. The company also said it expects subscription gross margin of 81%, reflecting a greater share of customers using hyperscaler infrastructure and rising AI adoption.

Management characterized the gross-margin pressure as a near-term investment and mix issue rather than a structural concern. It expects unit costs from hyperscaler infrastructure and AI model usage to improve over time as usage scales and the company optimizes its model mix. That expectation will need to be validated in future gross-margin performance.

ServiceNow also indicated that sales headcount increased during the quarter due to a combination of acquired personnel, continued investment in quota-carrying sales capacity and preparations for further growth in security and risk. Management said it intends to exit 2026 with the same total headcount it would have had absent the Moveworks, Vesa and Armis acquisitions, implying an effort to absorb those businesses while preserving operating leverage.

Demand, Customers and Pricing

The 98% renewal rate remained a key indicator of the durability of ServiceNow’s installed base. The company ended the quarter with 658 customers generating more than $5M in ACV, while 32 additional customers crossed the $20M ACV threshold from a year earlier.

Management said demand was broad across industries. Business and consumer services led vertical growth, with net new ACV up more than sixfold year over year. Education grew more than 125%, while telecom and media grew nearly 40%. Manufacturing also posted strong growth, though ServiceNow did not provide a figure.

Federal demand was another contributor to the quarter. Management said some U.S. federal on-premise revenue moved from Q3 into Q2, creating a timing benefit. It emphasized that the Q2 beat was not solely due to that shift and said the federal pipeline remains strong going into the third quarter.

AI adoption is progressing both through expansions among existing customers and sales to first-time buyers. Deal volume among first-time ServiceNow agentic AI customers rose more than 45% year over year. Management also said upgrades to AI-native SKUs are delivering pricing uplift within the previously disclosed 20% to 30% range, while Pro Plus pricing uplift continues to exceed 30%.

The company is maintaining a hybrid pricing model that combines subscription licensing with usage-based elements. Management argued that the model provides customers with more predictable costs than a purely token-based structure while allowing ServiceNow to participate in higher usage. Whether customers continue to accept those uplifts as AI deployments scale will be an important commercial test.

What is ServiceNow’s guidance and outlook?

ServiceNow raised its full-year subscription-revenue outlook by $15M at the midpoint, to $15.770B. The revised outlook implies 21% constant-currency growth for 2026.

For the third quarter, management expects subscription revenue of $3.975B to $3.980B, representing 20% constant-currency growth. It expects CRPO growth of 20% in constant currency and a 31% non-GAAP operating margin.

The relatively limited increase in the full-year revenue outlook, despite the Q2 CRPO beat, reflects both the timing of federal revenue and management’s stated preference for a prudent outlook in an uncertain spending environment. Management said it passed through the quarter’s net new ACV outperformance into full-year guidance, but it did not provide more detailed assumptions for the second half.

Product development remains a significant part of the outlook. ServiceNow said it expects to make a new conversational service-desk product generally available soon after beta testing. The product is intended to automate service interactions without traditional ticketing and is part of a broader planned rollout of AI-native offerings. The company did not provide revenue expectations for the new products.

Balance Sheet, Cash Flow and Capital

Capital allocation is nevertheless relevant because ServiceNow has completed acquisitions of Moveworks, Vesa and Armis. Management’s comments suggest it intends to integrate these businesses without allowing acquired headcount to permanently dilute its longer-term margin structure. Investors will need future filings to assess the cash, debt, dilution and integration costs associated with those transactions.

What Investors Should Watch

1. AI ACV Progress and Production Deployments

AI ACV exceeded $1B, and management remains confident in reaching more than $1.5B by year-end. Investors should watch whether the ninefold increase in customers running agentic AI in production translates into durable usage, expansion revenue and broader cross-workflow adoption.

2. Cybersecurity Revenue Conversion

ServiceNow is positioning security as a major growth vector following the Armis and Vesa acquisitions. The key issue is whether the combined asset visibility, identity and workflow portfolio can generate material incremental ACV without creating integration complexity or diluting margins.

3. Federal Demand in the Third Quarter

Some federal on-premise revenue shifted into Q2 from Q3. Management said federal demand remains strong, but Q3 results will help clarify whether the Q2 strength was primarily timing-related or the start of a more sustained acceleration.

4. Gross-Margin Pressure From AI and Hyperscalers

Management expects an 81% subscription gross margin for 2026 as AI usage and hyperscaler deployment increase. Investors should monitor whether lower infrastructure and model costs offset the added cost of AI consumption over time.

5. Revenue Contribution From New AI-Native Products

The planned conversational service-desk offering and other AI-native products could broaden ServiceNow’s addressable market. Initial customer adoption, pricing and sales efficiency will show whether these offerings create a meaningful incremental growth channel or remain primarily strategic product extensions.

AlgovestIQ Takeaway

ServiceNow’s second quarter showed that its core workflow business remains resilient while AI is becoming a measurable commercial contributor rather than only a product narrative. Subscription growth held above 20%, CRPO outperformed guidance, large deal activity increased and operating margin materially exceeded expectations.

The strongest operational evidence came from the combination of AI ACV surpassing $1B, accelerating AI deal activity and a sharp increase in customers using agentic AI in production. The company’s ability to sell AI into existing workflows, while also attracting first-time AI customers, supports management’s view that the platform can monetize enterprise demand for governed automation.

Cybersecurity is the most consequential strategic expansion. Armis and Vesa give ServiceNow additional capabilities in device visibility and identity governance, while its existing ITSM, ITOM and risk products provide a workflow and remediation layer. The opportunity is substantial if customers increasingly prefer consolidated security operations, but ServiceNow must still prove that its broader security platform can take meaningful share in a crowded market.

The modest full-year revenue guidance increase tempers an otherwise strong quarter. Management attributed part of Q2’s outperformance to a pull-forward of federal on-premise revenue and maintained a conservative posture for the second half. That makes third-quarter federal execution and ongoing CRPO growth important near-term indicators.

The central investment question is no longer whether ServiceNow can maintain growth in its core business. It is whether AI and cybersecurity can become large, durable extensions without compromising the company’s gross-margin profile or its historically strong operating leverage. Continued AI ACV growth, production deployments, security cross-sell and stable renewal rates would strengthen that case. Slower conversion from pilot projects to paid usage, persistent gross-margin pressure or muted guidance increases would weaken it.